CRM F3Q25 Earnings: Rise of Agents
A small beat, but big price reactions
From Starboard
Key Thoughts on the Stock
Overall small beat on the #s, 9% guide cRPO guide cleared out bear case worry, expanding margin and raised margin guide confirm CRM’s continuing push on margin. However, I think the ~+10% price reaction is quite a surprise. How I understand this is investors are realizing the strong position of CRM’s Agentic AI story, and therefore closing their shorts or/and leaning in for long. That being said, Agentforce is at the center of the stage, investors who were net short into the print closing their shorts are leaning in for the same reasons we like CRM 1) reasonably valued at ~25x FY26 FCF compared to the large cap peers at 30s, 40s, and even 50s; 2) uniquely positioned for Agentic AI story given the amount of valuable customers and proprietary data on the platform; 3) Agentforce is a never-like-before product which demonstrates clear ROI and efficiency; 4) on a path of expanding margin and growth reacceleration, pointing to a rule of 50 in the next 3-5 years.
While the results cleared out fear of further deterioration and set up a positive tone for FY26 growth, I believe there are still reasons to stay prudent given buying environment is not all clear and Agentforce is still very early. Material contribution will likely came in FY27 rather than FY26. Will this be a F3Q24 déjà vu when Marc called out green shoots too early and investors felt the pain in F1Q25 earnings? I think mostly likely not, given we had another year of digestion, 2025 IT budget starts loosening, partner checks show early signs of recovering, and most importantly, Agentforce came in as the game changer which should drive renewals and new deals according to what I heard. cRPO, indicated by the mgmt., is the most important metric to track deal momentum and acceleration, and we should monitor it closely. Still, the cRPO cons. #s look very reasonable to me.
Net/net, stock’s valuation is at an attractive 25x FY26 FCF. If CRM can return to DD growth, with an expanding FCF margin towards high 30s, plus the increasing contribution of Agentic AI, the stock should be set up well for a lot of upsides. Applying a 25x FY27 FCF with our modeled 10.8% revenue growth and 37.8% FCF margin, should give us a still nice 35% upside from today’s price.
Dream case scenario: Let’s say Agentforce achieve a 2% penetration in Service Cloud, implying a $2B run rate, which should contribute 4-5% growth. Then we also count in the price increases and acquisitions contribution (~$13B cash on hand), there is an clean path towards 15% growth. Then if we look for high 40% FCF margin, stock is at rule of 55, and will be traded at 30x+ FCF. Put the calculations together, stock has the potential to more than double in this dream case scenario.
Key Takeaways from Earnings
3Q results came in solid: cRPO +10.5% y/y, a 1.1% beat, bigger than last quarter 0.8% beat, driven by early renewals (also mentioned in 2Q) and strong new bookings (new one, not mentioned in 2Q). And on the callback mgmt. said these two elements are 50/50, an early indication of Agentforce driving more new deals. However, Amy said two times that Agentforce contribution is immaterial in this quarter. For core cloud, Sales and Service cloud both maintained DD growth (driven by ARPU growth), Marketing & Commerce cloud grew 1pts accel to 8%, while Slack, MuleSoft, and Tableau relatively weak. For verticals, CFO called out HLS, manufacturing and auto (was “more constrained” in 2Q), energy (“more constrained” in 2Q) performing well, with retail and consumer more measured. Attrition a little over 8%, in line with mgmt. expectation.
4Q guide cleared out some bear cases: one major worry is 4Q cRPO growth may guide 8% while mgmt. gave ~9%. That being said, if CRM guided 9% in 4Q, they would likely finish this year with 10% (or more) cRPO growth, and there will be room will more outperformances given the larger cRPO beat in 3Q than 2Q. Consensus for FY26/27 cRPO growth are at 9.8% and 10.1%, requires very less reacceleration and look fairly reasonable.
Agentforce showing good traction and demand, but too early for more details. Marc said CRM signed more than 200 Agentforce deals in just a week in 3Q and pipeline is in thousands. He also called out FedEx, Adecco, Accenture, Ace Hardware, IBM, RBC Wealth Management as the customers currently building agents. So far, the Agentforce deals are largely in Service Cloud. Agentforce contribution this quarter is immaterial, in line with our expectations, and mgmt. didn’t provide much color to ACV uplift. However, I am a little surprised that mgmt/customers seem to be happy with the $2/convo pricing, as mgmt. called it “high value”. What we heard from partners is AF pricing is really case-by-case, and my intuition is that $2 is really expensive, so we really have to see.
Data Cloud performing: Data Cloud was included in 1/3 of all $1M+ deals, and 8/10 top deals included Data Cloud. Another area to watch that should drive growth.
And I really like the JPM check this Q, quite correct directionally
